Innovative Industrial Properties, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts are in U.S. dollars; financial statement figures below are in millions unless stated otherwise.
Business context
IIP is an internally managed REIT that owns specialized properties leased primarily to state-licensed cannabis operators under triple-net leases. At June 30, 2020, it owned 58 properties in 15 states, with approximately 4.4 million rentable square feet, 99.2% leased by square footage, and a weighted-average remaining lease term of approximately 16.2 years. One Los Angeles property is treated as not leased because its tenant was in receivership and in default.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $24.3 | $8.6 | $45.5 | $15.4 |
| Operating income | $14.2 | $4.1 | $26.5 | $7.5 |
| Net income | $13.3 | $3.4 | $25.2 | $7.1 |
| Net income attributable to common stockholders | $13.0 | $3.1 | $24.5 | $6.4 |
| Diluted EPS | $0.73 | $0.30 | $1.45 | $0.64 |
| Operating cash flow | Not presented separately for the quarter | $43.1 | $14.6 |
- Q2 revenue rose approximately 183% year over year; management attributed most of the increase to properties acquired in earlier periods, with additional contribution from 2020 acquisitions and rent escalations. Six-month revenue rose approximately 195%.
- Calculated Q2 operating margin was approximately 58%, versus 47% a year earlier; calculated net margin was approximately 55%, versus 40%.
- Q2 FFO per diluted share was $1.12 versus $0.48; AFFO per diluted share was $1.19 versus $0.59. For the first half, FFO per diluted share was $2.16 versus $0.94 and AFFO was $2.31 versus $1.13. These are non-GAAP supplemental measures, not substitutes for GAAP earnings or cash flow.
Balance sheet, liquidity and cash flows
- Total assets were $1,179.1 at June 30, up from $745.9 at year-end 2019. Net real estate held for investment was $791.6, compared with $505.9.
- Cash and cash equivalents were $50.2, restricted cash $11.5, and short-term investments $323.3. Total liabilities were $209.2; exchangeable notes had a carrying value of $135.7 and principal of $143.7. The notes are the company’s only debt, bear fixed interest at 3.75%, and mature in February 2024.
- For the six months, operating cash flow was $43.1; investing cash outflow was $501.0, reflecting property investment, tenant-improvement funding and net short-term investment purchases; financing cash inflow was $402.3, mainly from common-stock issuances. Cash, cash equivalents and restricted cash ended at $61.6.
- Common dividends declared were $1.00 per share for Q1 and $1.06 per share for Q2. The Series A preferred dividend was $0.5625 per share for each quarter.
Material changes and notable items
- Eleven properties were acquired in the first half for total purchase price and transaction costs of approximately $139.0, across several states. The company also funded substantial construction and tenant-improvement work.
- Common shares outstanding increased to 18.6 million from 12.6 million at year-end 2019. January and May offerings and ATM sales generated approximately $434.8 million in aggregate net proceeds during the first half. A further July offering raised approximately $258.7 million gross.
- As of June 30, the company had approximately $158.3 million of tenant-improvement commitments and $12.4 million of construction-funding commitments. Contractual minimum rent over the remaining lease terms totaled approximately $2.64 billion, including $2.02 billion thereafter.
- PharmaCann represented 21% of Q2 rental revenue; Ascend Wellness represented 12%. The filing notes tenant and geographic concentration risks.
Outlook, risks and contingencies
- The filing provides no quantitative earnings or investment guidance. Management said it expected liquidity needs to be met through cash on hand, operating cash flow after dividends, and equity or debt financing, while noting financing may not be available on acceptable terms.
- COVID-19 caused temporary base-rent and property-management-fee deferrals for three tenants, with repayment and security-deposit replenishment scheduled over 18 months beginning July 2020. At August 6, the company reported collecting 100% of contractual rent due for April through July across the portfolio except the Los Angeles tenant in receivership; no additional rent deferrals had been agreed beyond the three tenants identified.
- Management reported no material adverse COVID-19 impact on results or financial position through June 30, but warned a prolonged outbreak could adversely affect the company and tenants. Risks include cannabis remaining illegal under U.S. federal law, tenant credit and concentration, regulatory changes, competition, and access to capital.
- The Los Angeles tenant’s ongoing default and receivership remain a specific risk. Holistic had agreed to acquire related operating licenses, and IIP was negotiating a replacement lease, subject to court approval and closing conditions; completion was not assured.
- The company reported no material litigation, environmental liability, impairment losses, or material change in risk factors. Disclosure controls were reported effective, with no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether rent deferrals are repaid as scheduled and whether reported rent collection remains strong, particularly for the Los Angeles property.
- Tenant financial health and concentration, especially PharmaCann’s share of rent and the effects of federal and state cannabis regulation.
- Timing, cost and funding of tenant improvements and construction commitments, including the $158.3 million allowance balance.
- Portfolio leasing, development completion and returns on recent acquisitions; reported square footage includes properties under development or redevelopment.
- Dividend coverage and future capital needs, including the effect of substantial common-stock issuance and potential further equity or debt financing.